Why are we Accumulating IDFC ?

April 22, 2015

IDFC has informed the exchanges that the shareholders have approved the de-merger of IDFC into IDFC Bank. Each IDFC shareholder will get one share of IDFC Bank. With the shareholder approval in place IDFC is on track to start the banking operations from Oct 1, 2015 as planned. IDFC has already received RBI approval and the effective date of de-merger is likely to be within one and half a months.

IDFC is already complaint with the reserve requirements of RBI (CRR/SLR) and the total balance sheet size is likely to be ~700bn with ~550bn of loans. IDFC plans to start the bank with ~20 branches on day one itself. Almost 95% of IDFC’s assets and liabilities will be transferred to IDFC Bank and the balance into IDFC IDF.

The current listed IDFC will be the parent organization; the NOFHC will be the 100% step-down sub as stipulated by the RBI. IDFC Bank and other opcos (IB, AMC and PE) will be subs of the NOFHC. The parent IDFC and IDFC Bank will be separate listed entities. IDFC Bank’s shareholding will be 51% NOFHC and the rest mirroring the current IDFC shareholding.

We believe IDFC’s foray into the banking business will be a significant advantage in the longer term as it strengthens its funding profile and diversifies its loan book. We believe IDFC’s higher loan-loss reserves will cushion against any stress on asset quality in the near term. This should mitigate much of the P&L damage from NPLs.

IDFC Bank will be 51% owned by the NOFHC and 49% by existing shareholders – this will open up significant headroom for FIIs, who are currently restricted. We think the bank would, therefore, be a far more liquid stock with stronger potential rerating. The parentco stub would also suffer from holdco discounts as all the opcs are step-down subs – the only advantage of owning it would be a more diversified income stream from non-banking businesses.

We are Accumulating the Stock with Long Term View [3+ Years] as this is going to be another Professionally managed Bank.